May 6, 2019
The advice gap is dramatically overstated
There have been many ‘Chicken Little-esque’ predictions that the sky is falling in, that FASEA and the...
With quiet fury, Commissioner Hayne handed down his report. His commentary was scathing. The participants in Australia’s financial system (including its regulators) have been taken to task for greed and ineptitude.
The recommendations are extensive, 76 in all; but on reading the 10 relating to financial advice and another 9 focussing on superannuation, you could be forgiven for thinking it’s business as usual. Each day of the public hearings seemed to bring new shame on our industry, and so the expectation for large-scale change was strong. And yet there is no recommendation that will structurally change our industry. Rather, the Commissioner concluded that industry changes already in train, other recommendations in the final report, and the evolution of technology would improve the management of conflicts by advisers, and eliminate some conflicts – and that he felt unable to calculate whether a positive net benefit existed for structural separation. This represents a large backdown from the principles expressed in the interim report and something of a leap of faith given the evidence and history of the industry.
A welcome anti-climax and green light for vertical integration as we know it? We think not.
We followed Commissioner Hayne’s advice to read the recommendations “in light of the reasons given for making it and what is said about other steps regulators, entities and the industry more generally can, and should, take in response…”. So we read on and found extensive commentary on a part of the industry that needs no regulatory change at all – but one where (in the Commissioner’s view at least) trustees need to simply apply the current law.
We focus here specifically on the recommendations about members paying for advice from their super accounts, which is very common practice. In our experience, funds have varying approaches to this: some will allow any super or retirement-related advice to be paid for out of the fund whilst others take a more facilitative approach in that all advice fees are allowed to be deducted.
However, Commissioner Hayne has a very low opinion of the value of advice to most people, and in particular in an ongoing context. He takes a very narrow view of the superannuation sole purpose test when he challenges whether even advice fees relating to retirement planning are directly relevant to the fund, and states that advice fees for anything beyond account consolidation, super fund selection and asset allocation should be paid for out of the client’s own pocket.
This didn’t come up in the recommendations because the Commissioner believes this to be the current position at law and thus no change is required (although the prohibition of advice fees in MySuper is new).
There are two key insights in the commentary:
1. The Commissioner has re-defined the role of advice as being investment-dominated rather than holistic in nature (which would appear to take us back a good 20 years). Our research shows advisers’ propositions are
mainly focussed on coaching and strategic advice rather than investments);
2. The Commissioner appears to see the MySuper environment as being inconsistent with the need for personal advice.
If the regulators agree with the Commissioner, what will happen?
The demand for advice as we know it will undoubtedly fall rapidly, and advisers may have to reinvent themselves as investment advisers. Most advice customers pay for advice out of superannuation, and very little of that fee meets the suggested definition for what is allowed to be funded from super. Assuming it is difficult to convince those same customers to pay out of their bank accounts, demand for advice will fall and advisers will either have to leave the industry far ahead of the FASEA implementation because they simply have no clients, or re-focus on providing investment rather than strategic advice. Concerns about further education will be far from their minds.
The report acknowledges part of this issue, continually making the point that if consumers are not willing to pay for advice out of their own pocket, then they clearly do not really want it.
That might make sense, but it avoids the bigger question: ‘do they need it?’
Clearly they do – it’s difficult to suggest that most Australians can retire effectively without financial advice of some sort. The current system is complex and most people require help in navigating it. Nevertheless, the benefits of advice can be intangible (at least when looking forward) and therefore it can be hard to convince people to pay even though it’s in their interest.
Either way, if we apply the Commissioner’s outdated definition of financial advice, focussing on investment-related rather than strategic questions, it’s clear to us that quality will go down.
This will create a genuine advice gap in a big market segment.
The very well-off, many of whom already pay more than $10k for advice out of their bank account will be fine. Keep calm and carry on, as they say. At the opposite end of the spectrum, members who can be adequately served by intra-fund and robo advice will also be fine. Their funds remain free to pay for the fixed cost of implementing a robo solution and all members will likely pay for it (or most of it) through their weekly admin fee.
But what about the masses in the middle? Those mass affluent and affluent members who make up the bulk of advice clients today. They will be knowingly unadvised.
This seems hardly the time for the industry to mount self-serving arguments in favour of the status quo (particularly since so much of the status quo has been entirely untouched by the Commissioner’s report), but if the industry allows the deduction of advice fees to be severely curtailed and the definition of suitable advice to be rolled back 20 years then this might be the time the threat of an advice gap truly eventuates.